On January 15, 2019, the U.S. Court of Appeals for the D.C. Circuit (“D.C. Circuit”) in San Diego Gas & Electric Co. v. FERC, No. 16-1433, denied San Diego Gas & Electric’s (“SDG&E”) petition for review of FERC orders declining retroactive application of its cancelled or abandoned electric transmission facilities incentive (“Abandonment Incentive”). The D.C. Circuit’s decision denies SDG&E the eligibility to recover, in the case of abandonment, approximately $15 million in development costs associated with its South Orange County Reliability Enhancement Project (“SOCRE Project”). The decision also prompted a dissent from Senior Circuit Judge A. Raymond Randolph, who argued that the underlying FERC orders were contrary to the plain language of the regulation at issue, as well as the Commission’s own precedent.

SDG&E’s SOCRE project seeks to improve a substation as well as transmission and distribution line segments serving approximately 300,000 residential customers in Southern Orange County, California. SDG&E proposed the project in 2008 and submitted the project to the California Independent System Operator’s Transmission Planning Process in time for the project to be included in the 2010-2011 Transmission Plan. The company thereafter began project development, including applying for a Certificate of Public Convenience and Necessity from the California Public Utilities Commission. SDG&E also filed a petition for declaratory order with FERC in September 2015 seeking to establish the company’s eligibility for the Abandonment Incentive, including recovery of approximately $31 million it had already spent on the project.

As one of eight incentive-based rate treatments established by FERC pursuant to the Energy Policy Act of 2005 (“EPAct 2005”), the Abandonment Incentive promotes capital investment in transmission upgrades by permitting utilities to recover from ratepayers “100 percent of prudently incurred costs of transmission facilities that are cancelled or abandoned due to factors beyond the control of a public utility.” 18 CFR § 35.35(d)(1)(vi). The incentive aims to provide companies with more certainty during the pre-construction and construction periods by assuring recovery of the costs of projects that are abandoned for reasons beyond their developers’ control.

FERC granted SDG&E the Abandonment Incentive in a March 2016 declaratory order but with an important caveat: SDG&E would only be eligible to recover its prudently incurred costs associated with the SOCRE project going forward. As for the $31 million SDG&E had already spent, FERC held that in the event of abandonment, SDG&E could share only half of those costs with ratepayers pursuant to FERC’s 1988 Opinion No. 295 (that opinion generally limits utilities to fifty-percent cost recovery for certain prudently-incurred costs of abandoned transmission facilities). FERC reiterated this position in an October 2016 order on rehearing, asserting that because SDG&E had already invested that money, there was no showing that “the incentive was needed to encourage SDG&E to make the investment in question” (see October 31, 2016 edition of the WER). SDG&E’s petition for review followed.

In denying SDG&E’s petition for review, the D.C. Circuit held that FERC’s orders complied with the Federal Power Act (as revised by EPAct 2005) and the Commission’s incentive regulations. The D.C. Circuit deferred to both FERC’s policy that incentives must be “rationally tailored” to the risks presented by an investment, and to prior orders articulating that FERC “will not, and cannot, create incentives to motivate conduct that has already occurred.” The court concluded:

Where FERC commits ratepayers to cover costs of abandoned projects, it should at least demand that utilities maximize ratepayers’ benefits from those commitments. The longer a utility waits to secure abandoned-plant rate authority and the more it spends before doing so, the higher its costs of capital in constructing successful projects—costs that are ultimately passed on to consumers.

In a dissenting opinion, Senior Circuit Judge Randolph took issue with FERC’s theory that incentives cannot influence behavior that has already occurred, noting that “[t]he prompting effect is generated by the announcement of the incentive even if the ultimate award is conditioned on some later showing.” Judge Randolph also argued that the plain language of the Abandonment Incentive permits a utility to recover 100 percent of prudently incurred costs regardless of when or how the utility seeks authorization from FERC, and that tying eligibility for the Abandonment Incentive to the date of FERC’s order will result in an applicant’s recovery being dependent on FERC’s caseload and efficiency in issuing orders. Finally, Judge Randolph pointed to prior FERC orders that permitted recovery for abandonment costs incurred prior to the date of filing an application, and argued that FERC acted arbitrarily and capriciously by failing to adequately justify its departure from this precedent.

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